EXHIBIT C

Power purchases by distributing cooperatives in lower Peninsula of Michigan, fiscal year ending June 30, 1965

PURCHASES FROM INVESTOR OWNED UTILITIES

Source: 27th Annual Report of Energy Purchased by REA Borrowers, Rural Electrification Administration, U.S. Department of Agriculture.

STATEMENT OF DANIEL W. CANNON, POLICY EXECUTIVE, INDUSTRIAL ENVIRONMENT DEPARTMENT, NATIONAL ASSOCIATION OF MANUFACTURERS, NEW YORK, N.Y. This statement is submitted on behalf of the National Association of Manufacturers, a voluntary association of business enterprises which account for some 75 per cent of the nation's manufacturing production and about the same per cent of manufacturing employment.

The National Association of Manufacturers endorses the objective of shifting the financing of the appropriate activities of rural electric cooperatives from a subsidized government source to private sources. By "appropriate" activities, we mean "the furnishing of electric service to persons in rural areas who are not receiving central station service," as set forth in the Rural Electrification Act of 1936. We do not mean the construction of generation and transmission facilities where an adequate supply of power is already available to the borrower at rates which, after making due allowance for the tax components included therein, are as favorable or more favorable than those which would result from the facilities to be financed by the proposed loan.

Such a shifting of financing would be entirely in accord with the official stated policy of the Association on "Federal Lending Operations." This policy statement advocates that steps be taken to reduce the scope of, and ultimately terminate, federal lending activities, but that the method used should avoid sudden or undue hardship to those sectors of the economy which have become dependent on this form of government support. Some of the suggested methods are (1) Transferring to private ownership such agencies as can be so transferred; (2) Making all credit operations, which are not readily transferable to private ownership and operations, self-supporting by appropriate increases of fees, interest, premiums or other charges; and (3) Increasing the risk of borrowers and beneficiaries as a condition of securing government financing help.

It is in this light that we would like to examine S. 3720 and the draft bill of the Department of Agriculture, bills to amend the Rural Electrification Act of 1936. Both bills are lengthy and complicated. However, the following is a brief summary of the bills as they apply to rural electric cooperatives:

1. The bills would establish a Rural Electric Bank (S. 3720) or a Federal Bank for Rural Electric Systems (draft bill) to make loans to rural electric cooperatives. Under S. 3720, the President of the United States would initially appoint 12 members of a 13-member Electric Bank Board, three from the Department of Agriculture, three from the general public, and six representing the rural electric systems. The Administrator of the Rural Electrification Administration would also be a member of the Board and would serve as the chief executive officer (Governor) of the Bank.

2. Funds for the Bank's capital stock would come from the U. S. Government— $750 million at the rate of $50 million per year for 15 years-with no provision for payment of interest on this money or any timetable for its repayment.

3. The Bank would be authorized to borrow, by issuing debentures, up to eight (S. 3720) or ten (draft bill) times its paid-in capital and retained earnings. This could be $8-10 billion or more. It has been estimated that the total program over 15 years could involve more than $17 billion.

4. The present REA 2% loan program would be continued. In addition, the Bank would be authorized to make so-called "intermediate loans" at 3% (S. 3720) or 4% (draft bill). Loans at a higher rate designed to cover the Bank's cost would also be authorized, but it appears problematical whether any loans would be made at that rate as long as "intermediate loans" or 2% REA loans were available. Loans could be made for the construction of generating and transmission facilities, as well as for distribution facilities. Loans could also be made for the acquisition of facilities owned by municipalities or investorowned electric companies.

The duration of the loans would be as high as 50 years, and the schedule of payments of interest and principal could be adjusted by the Bank's Governor (REA Administrator). Loans could cover 100% of the cost of the facilities to be constructed or acquired, with no equity required of the borrower. The restriction on REA 2% loans that they be limited to service for persons not already receiving central station service in places of less than 1,500 population would not apply to loans made by the Bank.

5. The property and income of the Bank would be exempt from "all taxation now or hereafter imposed by the United States, or by any State, territorial, or local taxing authority. . ." Under S. 3720, this tax-exempt status would appar

ently continue in perpetuity since the Bank would continue to be an instrumentality of the United States even after so-called "Conversion" under Section 410.

6. If the Bank did not have sufficient funds to pay interest or principal on its debentures, it could borrow money from the U.S. Treasury without an appropriation by Congress. Section 407 (b) of S. 3720 authorizes this as a "public debt transaction," which is popularly known as "back-door spending."

7. A "rural electrification account" would be established in the U.S. Treasury, and it would have as assets the $3.34 billion of evidences of debt presently held by the REA; $883 million of "undisbursed balances" of electrification loans; all collections of principal and interest received on and after July 1, 1966 (S. 3720); all future appropriations for electrification loans and for the administrative expenses of REA; and shares of the Bank's capital stock. This account would resemble a revolving fund because money placed in it could be used for designated purposes without further appropriation by the Congress. Thus, these money outlays would not have to be reflected in the Federal Budget submitted by the President to the Congress each year.

It is clear that the bills as such do not accomplish a transfer to private ownership. There is a declaration of policy objective that the Bank will become entirely privately owned, operated, and financed . . .' Also, there is a provision in Section 406 (c) of S. 3720 and Section 405 (c) of the draft bill that the class A stock (the stock issued in exchange for the capital furnished by the United States Government) "shall be redeemed and retired by the electric bank as soon as practicable after June 30, 1981, but not to the extent that the Electric Bank Board determines that such retirement will impair the operations of the electric bank." And there is a provision in Section 412 of the draft bill that "As promptly as practicable after all class A stock issued to the United States has been retired pursuant to section 405 (c) of this title, the Secretary shall transmit to the President for submission to the Congress recommendations for such legislation as may be necessary or desirable to make appropriate provisions for the transfer to class B, class C and class D stockholders of the ownership and control of the electric bank in order that its operations may thereafter be carried on as a privately owned, operated and financed banking corporation." Section 410 of S. 3720 puportedly provides for some sort of "Conversion" of the Bank through a shift of powers to the Board (although the Bank would continue in perpetuity "as an instrumentality of the United States") "Whenever after retirement of Class A stock . . . has begun. . . the total amount in stated value of Class B and Class C stock outstanding equals two-thirds of the total amount of Class A, Class B and Class C stock outstanding . . ."

However, even these provisions seem to be in the category of pious hopes because they do not really establish any schedule, program or procedure for the retirement of Class A stock. In any event, the retirement would not even begin until 1981 and there is no timetable or deadline set at all. It appears that a considerable amount of such stock must be outstanding for many years after 1981 in order to provide the subsidy involved in the intermediate loans to be made by the Bank. Thus, it is not possible to estimate when, if ever, the Government's stock would be retired. Perhaps transfer to private ownership could not be attained for at least 65 years. Consequently, for all practical purposes, the bills must be evaluated as a proposal to create a new Government corporation to engage in the banking business rather than as a proposal for transfer to private ownership.

Viewed as such, the bills should be analyzed to determine whether they move in some other way to reduce the scope of federal activities. The first point to be noted in this connection is that the Bank lending program would in no way displace the present REA 2 per cent lending program. The bill title refers to "additional" sources of financing and the declaration of policy refers to "supplementary" financing. The amendments to the Act are set forth in the form of new titles, so that they would in no way modify the existing authority of REA to make 2 per cent loans should Congress continue to provide the necessary funds. Section 411 of S. 3720 and Section 413 of the draft bill make it very explicit that "powers and authority provided for in this title IV shall be cumulative..." Therefore, in this respect, the bills make no contribution whatsoever toward reducing the scope of federal activities.

Section 408 of S. 3720 and Section 410 of the draft bill would authorize the making of "intermediate" loans with no annual total dollar limitation. Since these loans would also involve subsidy (a 3 per cent interest rate in S. 3720 and